Exclusive: ESG funds slump behind peers as energy and defence stocks bolstered by war
Environmental, social and governance (ESG) funds in the UK have slumped below their industry peers this year as oil & gas, mining and defence stocks surge in the wake of war in Ukraine, new research has revealed.
UK large-cap equity funds with the highest ESG ratings have performed far worse than funds with the lowest ESG ratings, down 13 per cent in the past year compared to just four per cent for funds with the lowest rating, new research from Bowmore Asset Management revealed today.
ESG funds are typically overweight on life insurance and consumer discretionary stocks, analysts said, which have slumped against the wider market as inflationary fears grow and consumers feel the squeeze of a cost of living crunch.
Mining, oil & gas and defence stocks meanwhile have soared as prices spike in the wake of Russia’s invasion of Ukraine, and countries look to shore up energy supply and defence.
Analysts at Bowmore said that investors should not flee ESG, however.
“While it is tempting to question ESG funds due to their recent poor performance, investors need to be patient,” said Jonathan Webster-Smith, Chief Investment Officer at Bowmore.
“Over longer time horizons, earnings matter and ESG funds should deliver better returns than funds which don’t consider ESG due to the growth opportunity.”
He added that the investment expected into clean energy is going to be “significant”, but any ESG focused businesses should also do better through stronger “employee, customer and supplier relations.”
The findings come amid a wider reconsideration of ESG strategies in the wake of war in Ukraine as investors question the veracity of the strategies, after funds labelled as ESG were found to be tied up in state-backed Russian firms and energy giants.
ESG funds had at least $8.3bn invested in Russia before Putin attacked Ukraine on February 24th, according to Bloomberg data.
A survey by consultancy BFinance found in May that around 39 per cent of fund managers were now reconsidering their ESG approach in light of the war in Ukraine, with the inclusion of Russian firms and weapons manufacturers in supposed socially conscious investment strategies among the top reasons cited.
Analysts at the firm said there was a sense from investors that “more scrutiny” is needed into ESG policies going forward.
Paul Clements-Hunt, who coined the ESG term while working for the UN in the mid-2000s, told City A.M. the label had been exploited by some firms to attract easy cash.
“Marketing sustainability, green and ESG, however an asset manager wished to package it, was an easy win for asset gathering over a couple of years or more,” he said
“But increasingly managers will be held to account as policy-makers, prudential oversight institutions and regulators seek to end a Klondike gold rush for easy assets.”